By Advisors' Academy
November 5, 2021
Resolve to Review Your Strategy Before New Year's
So much for “The October Effect”. The idea that stock market crashes are common in October was not only rejected by Wall Street last month, but completely reversed. After falling by about 5% in September, the market rebounded strongly in October, with all three major indexes hitting new peak highs. What fueled the rally? Will it continue or is another big correction still possible? More importantly, are you still comfortable with your current strategy?
Let’s start with the first question: what drove this big resurgence in investor optimism last month? It’s tough to say. Most of the economic data that emerged in October was mixed, and none of the issues that triggered September’s volatility really went away, although some did improve. Third quarter GDP growth came in at 2%, which was below the expected 2.8% and a big drop from the over-6% growth achieved in the first and second quarters.* The slowdown was blamed on several factors, including the rise in Covid-19 variant cases over the summer and the dwindling impact of all the government’s coronavirus relief efforts. Meanwhile, supply and labor shortages continued to fuel inflation, which is expected to hit a well-above-average level of 4.2% by the end of the year.**
Naturally, a lot of this data is backward-looking, and the markets are forward-looking. So, what are investors seeing to make them so optimistic again? Well, there are some hopeful signs. New coronavirus infections have dropped nearly 60% since peaking in September, and several important economic indicators improved in October, from jobless claims to consumer confidence. With the holiday season on tap, growth is expected to rebound to 5% in the fourth quarter, which would give the economy its strongest year of growth since 1984.***
A Lot of Faith
In addition, long-term interest rates leveled off again in October and are expected to remain stable, and the Federal Reserve has vowed to move cautiously with its plan to start raising short-term rates and rolling back quantitative easing. For now, investors seem to have faith in that promise, just as they have faith that coronavirus cases will continue to decline. Plus faith that inflation is transitory; and faith that Joe Biden’s tax plan won’t sabotage corporate earnings; and faith that no other skeletons will pop out of the world’s geopolitical closet to disrupt the global markets. That’s a lot of faith, and it could all prove to be justified. Or not. The Fed could mistime its next move, inflation and Covid-19 cases could spike again, Biden’s tax plan could undercut earnings projections in a major way, and any one of those factors could trigger another big correction of 10 to 15%.
So, what does it all mean for income investors like you? Well, for the most conservative investors, stable interest rates should mean little-to-no value fluctuations on the individual bonds and bond-like instruments in your portfolios. We saw some of that when rates spiked significantly at the start of the year, and when they jumped again slightly in September. However, even if your values did temporarily drop a bit, your income return was unaffected. You can continue to rely on this core principle of the income model even if long-term rates do rise again by year’s end, which I personally don’t believe will happen in any significant way.
Low, stable rates also bode well for the stock market (as noted), and that’s good news for income investors with a higher risk tolerance who are using dividend-income strategies. But what if we do get that 10 to 15% correction by year’s end? Well, that would create a perfect buying opportunity that could allow you to increase your income and your growth potential as the market recovers and starts growing again in 2022.
The Big Takeaway
Here’s the big takeaway from all this. Look at your statements, look at the markets, and then think back to March of 2020 when the stock market took that fast drop of about 40% when the coronavirus first hit. Were you a nervous wreck? Did you think, “I don’t ever want to feel this way again,” and vow to make changes to lower your investment risk, only to forget about it once the markets recovered a few months later? If so, remember that feeling now and take action before the end of the year. At the very least, call our office and schedule an appointment to talk about it. If you realize you’d still feel more comfortable with less risk in your allocation, we can work with you to make those changes.
By the same token, if you think back to March of 2020 and realize you weren’t strongly affected by the sell-off, you might be in a place now where you want to get more aggressive. You might be thinking, “I know I got into the universe of bonds and bond-like instruments to be more conservative, but I’ve been seeing my 401(k) perform very well throughout the recovery and I’d like to get some more of that growth potential in my income portfolio.” If that’s the case, call us and make an appointment to talk about how we might increase your risk a bit to help you achieve that goal. Remember, with our strategies you can do it without switching your focus back to growth.
The main point is, don’t wait! Make an appointment now to review your allocation and reassess your risk tolerance. Do it before Thanksgiving, because after that there’s a good chance you’ll get too busy and distracted with the holidays to think about it. Don’t miss the opportunity to better protect your money or, depending on your risk tolerance, position yourself for more income and more growth potential in 2022!
*“Economic Growth Rate Slows to 2%,” CNBC, Oct. 28, 2021
**“Fed Ups Inflation Forecast,” Forbes, Sept. 22, 2021
***“Economic Growth Lagged in the Third Quarter, But Hopeful Signs Abound for the Rest of 2021,” The Washington Post, Oct. 28, 2021